It’s not hard to see why managers are worried about the threefold increase in the value of Shanghai-listed stocks this year.

Ahead of its listing, Alibaba.com, a wholesale version of online auctioneer eBay, saw $58bn chasing the $375m earmarked for Chinese investors. Global institutions offered $160bn for an allocation totalling $1bn.

Last week, shares in PetroChina showed Buffett a clean pair of heels by surging 160% on the back of a placing that pushed the company’s market value above $1 trillion.

Listed companies are staging initial public offerings to boost their profits. Chinese retail investors, who like a gamble, have become day traders while others are piling into equity funds. Privately owned enterprises, overwhelmed by the success of their businesses, are adding to the euphoria by backing financial businesses and stocks in other companies.

Liu YongXing’s East Hope, for example, was started in 1982 to raise quails and chickens in Sichuan province. It has become China’s largest animal feed supplier and has backed the Mingsheng Banking Corporation with a patriotic flourish.

Stuart Kinnersley, investment chief at fund manager Nikko Asset Management Europe, said: “We believe there has been a substantial increase in the number of Chinese companies taking a cross-holding in other stocks.”

All of which shows that China could be a land of great opportunity, dangerously exposed to the risk of over-expansion, or more probably, both.

Xian Quanqiang, who co-manages the First State China Growth fund, said earnings multiples in Shanghai are too high. Prices have been pushed up by the buying and selling of stocks in companies where free floats can be as narrow as 10% – PetroChina is 86% owned by the state and its free float on the mainland is only 2%.

Trading has also mushroomed because retail investors are forced to restrict their trading to Chinese stocks. A surge in inflation to 6.2% in September has provided extra reason for Chinese individuals to protect their wealth by trading stocks or funds.

Quanqiang denies that corporate buying and selling of stocks is out of control. Kinnersley said the level of cross-holdings bears no resemblance to Japan at the peak of the 1980s boom. But there is no doubt that it has pushed up values.

Low US interest rates have also encouraged foreign investors to pile into stocks listed in China as well as other emerging economies. Sophisticated Chinese players have taken advantage of the dollar link to leverage their investments.

It is only fair to add there are fundamental reasons for the share-price surge. According to Quanqiang, there are good reasons to buy Chinese stocks listed in Hong Kong. He said: “Profits growth in the first half of the year was 71%. Core profits were up 53%. Hong Kong multiples, at 22 times, are much lower than Shanghai.”

China’s GDP growth this year is likely to hit 11.5%, according to analysts. By comparison, US growth will be 2%.

Quanqiang searches for stocks offering sustainable earnings. He said First State also strives to test the integrity of managements, given the embryonic nature of corporate governance in China.
It sold its shares in Wumart, China’s largest supermarket chain, this summer following the decision of the authorities to investigate past dealings of its chairman Zhang Wen-Zhong, a former Government official.

Incidents like this remind China of its status as a novice in the ways of finance, which never played much of a role in central planning in the past.

Its banks are more used to dishing out state funding than carrying out sophisticated transactions. In his book The Age of Turbulence, former US Federal Reserve chairman Alan Greenspan recalled the day in 2003 when Liu Mingkang, chairman of the Chinese Banking Regulatory Commission, visited him.

He said: “He acknowledged that Chinese banks lacked the professional expertise to judge what enabled a loan to be repaid. Liu indicated that increasing the foreign bank presence could help. I suggested what China needed was people who had worked in a market economy and had the sharp eyes and competitive judgment of able loan officers in the west.”

But Greenspan concedes China has progressed along the capitalist road since 2003. It has also gone out of its way to strike deals with western banks and asset managers prepared to offer expertise in return for access to Chinese markets.

However, China has to devise ways of achieving a soft landing for its overheated stock market. Measures taken by the authorities this year include rises in stamp duty to 0.3% and in interest rates to 3.6% and granting permission to qualified investors to put money abroad.

Quanqiang says this does not add up to much. But to be fair, financial authorities around the world are slow to tighten lax monetary conditions for fear of rocking the banking boat.

Analysts have argued the Federal Reserve allowed interest rates to stay too low for too long after the 9/11 destruction of the World Trade Center.

The policy encouraged banks to step up mortgage lending to sub-prime customers, who became unable to service them when interest rates rose. The valuation of structured products that used them have become impaired.

A new round of US rate cuts designed to get the banks out of a problem of their own making has seriously weakened the dollar, which was trading at multi-year lows even before the sub-prime crisis, due to the weakness of the US economy.

These events should alert China to the fact that western financiers are not always worthy of imitation. But the Chinese will be forced to deal with a local crisis in due course. They’re only human, after all.